Social and Financial Efficiency of Microfinance Institutions

Abstract

The performance of Microfinance Institutions (MFIs) is examined in this paper. MFIs have a double aspect: financial and not-for-profit. It is, therefore, appropriate to assess their performance by means, not only of financial ratios, but also by means of social indicators. We propose the use of Data Envelopment Analysis (DEA) as a way of assessing the relative efficiency with which an institution uses inputs in order to generate outputs. The outputs can be either financial or social. We also study the relationship between financial and social efficiency, and between these and other indicators. We have used Principal Components Analysis, Cluster Analysis, and Multivariate Regression as analysis tools. The results show that it is possible to explain the performance of a MFI by means of a reduced set of variables. The paper ends by discussing the need to extend the use of social efficiency indicators, as we consider that they are appropriate in the assessment of the performance of MFIs.

The social and financial efficiency of microfinance institutions: the case of Bosnia and Herzegovina

“…Institutionalists focus on the financial aspects and are concerned with selfsufficiency and sustainability (Serrano-Cinca et al 2009). On the other hand, welfareists claim that MFIs have to help the poor first, while profitability should be a secondary concern (Serrano-Cinca, et al 2009). Accordingly, there is a belief that MFIs can achieve sustainability without achieving financial self-sufficiency (Morduch 2000).…”

“…The relationship between financial and social efficiency measured by DEA was also the research focus of Serrano-Cinca et al (2009). Of the 89 MFIs included in their international sample, only 13 show a higher level of social efficiency in comparison to financial efficiency.…”

“…Specification of the inputs and outputs is crucial step when analyzing a financial institution (Serrano-Cinca et al 2009). Berger and Humphrey (1997) suggest that one could assess efficiency under a variety of different output/input specifications, and see how the calculated efficiencies change as the specification changes.…”

“…Berger and Humphrey (1997) suggest that one could assess efficiency under a variety of different output/input specifications, and see how the calculated efficiencies change as the specification changes. Still, there is no clear guideline on how to chose among a variety of specifications (Serrano-Cinca et al 2009). Researchers may be tempted to add as many inputs and outputs as they find important or relevant for the purpose of their analysis, but problems arise if some of them are highly correlated (Jenkins and Anderson 2003).…”

On The Two-Way Relationship between Corporate Reputation and Financial Performance in Microfinance: A Stakeholder Approach

“…In microfinance, financial performance is concerned with profitability, productivity and efficiency of an MFI (Balkenhol and Hudon, 2012, Serrano-Cinca et al, 2012and Ledgerwood, O'Keeffe, & Arevalo, 2013. "Efficiency is a matter of transforming inputs such as staff, funds, and equipment into loans, deposits, other financial and non-financial services at least costs" (Balkenhol & Hudon, 2012, p. 385).…”